Understanding market momentum is critical for investors and traders. Fund flows, the ebbs and flows of the $1.7 trillion market for U.S. listed exchange-traded products (ETPs),1 can offer valuable insight into which parts of the market may have the wind at their back—or in their face.
The latest information from BlackRock® iShares® Capital Markets shows there may be some changes afoot.1
U.S. stock funds stop the bleeding
Over the past several years, stock fund flows have been strong, while bond flows have languished. This should come as no surprise, as investors gravitated toward the generally higher returns that stocks have offered.
That trend did not continue in the early part of 2014, suggesting the momentum for this category was slowing. In the 30 days prior to May 9, $9.6 billion had left U.S. stock funds.
Fund flows can be a meaningful indicator
Yet during the week ending May 16, 2014, U.S. stock funds increased for the first time in five weeks. Within this category, the gains were mostly spread out across sector, large cap, and small/micro cap funds.
Sector funds still a draw
Five of the last six weeks have seen inflows into sector funds as investors continue to use sectors to adjust their asset allocation. Of the $3.9 billion inflows to U.S. stock funds during the May 16 week, $1.2 billion went into sector funds, with heavy buying of energy funds ($684 million) and utility funds ($348 million).
Meanwhile, sizable outflows continued for financials (-$408 million) and health care (-$243 million), two sectors that have seen significant outflows during May thus far.
Net inflows for bonds
Stock funds aren’t the only place where there have been shifting winds.
Bond funds unpacked
Fixed income, which had experienced strong outflows over the past several years, continues to be a positive surprise in 2014. Fixed income fund flows gained for the fourth straight week, driven by healthy demand for longer duration investment grade exposure (see sidebar).
Diving deeper into the fixed income ETP world, floating-rate debt funds—which are funds based on floating interest rates—saw their first outflow in 95 weeks in mid-April (see chart below),2 after surging over the past several years as investors have anticipated rising interest rates. That fear seems to have abated somewhat as U.S. Treasury yields have been relatively range bound since September 2013.
Winners and losers by country
Much of the geopolitical headlines have been dominated by Russia over the past month. Despite a credit rating downgrade from S&P in April amid another round of sanctions, outflows from the oil-rich Eurasian nation during 2014 have been relatively contained.
However, fellow BRIC nations, China and Brazil, have been the largest sources of emerging-market weakness over the past several months, in terms of fund flows. Meanwhile, India stock funds gained again, adding nearly $200 million in flows last week, riding the victory wave of India’s next prime minister, Narendra Modi. Spain, Mexico, and Italy are also seeing relatively strong inflows, displaying surprising resilience considering some of the structural issues these countries face.
Where might the flows go next?
Some forecasts are calling for stocks to move sideways in the coming weeks and months. If that is indeed the case, there may continue to be some bifurcation within the stock and sector funds universe. Can bond funds continue their run of momentum? Despite the consensus, bonds certainly shined in the first quarter of 2014 and bond fund flows have reflected that strong performance.
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
Past performance is no guarantee of future results.
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